The biggest financial pitfall to avoid when getting divorced

Divorce rates are soaring among the over-60s, according to reports from the International Longevity Centre.

In fact, the number of us deciding to get divorced in later life increased by 85% between 1990-2012, and the think tank is predicting that there will be over 22,000 divorces among this age group by 2037.

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Protecting yourself financially is crucial for anyone separating from a partner but, for women in particular, a late-life divorce means that getting your retirement plans sorted is absolutely crucial. Despite this, almost half of women have no idea what happens with pensions when couples get divorced, according to Scottish Widows' Women and Retirement Report 2017.

The stats also show that women are disproportionately affected by pension loss: a quarter of women have a pension pot smaller than their husband's, and 16% lost access to a pension when they split from their partner.

Failing to take pensions into account is one of the biggest financial pitfalls women can make when it comes to getting divorced – here are three steps you should take to make sure you're financially secure...

Too many women make the mistake of prioritising property (56%) over separating a pension (9%), but this could leave you without enough money to live on when you retire – meaning you have to downsize or sell your family home.

With the average pension pot being £132,000, more than the average cost of a home in Bradford, it's important to fight for a fair share.

Kate Smith, Head of Pensions at Aegon, said: 'Divorce can be devastating, both emotionally and financially, at any stage of life. The impact on retirement plans can be particularly difficult for women who typically build up lower pension pots than men, partly due to career breaks and lower average salaries.

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'Pensions, just like other assets such as houses and ISAs, can be taken into account for financial settlements. It’s common for women with school-age children to keep the family home and, in return, their ex keeps their pension intact. If this happens, you will lose the right to any spouse’s pension.

'Although this may work well in the shorter term, it could limit your plans for retirement if you don’t take pension saving into your own hands as soon as possible. The value of a pension should not be underestimated when going through a divorce. Pensions are valuable assets, and may be worth as much as your home. It’s important that you fully understand how pensions built up by you and your ex are likely to be affected.'

2) Don't underestimate how much a pension could be worth

If you or your partner has a final-salary pension, it's easy to fall into the trap of underestimating how much it's worth.

Mary Waring, MD at divorce finance specialist Wealth for Women, explained: 'Under today’s flexible pension rules, anyone with a private sector defined benefit, also known as a final-salary scheme, can demand a cash transfer and if they are 55 or more, obtain what could be a considerable lump sum.

'The transfer value of a defined pension may be more than 30 times the annual income. So, if your other half has built up a final-salary pension of just £7,000 a year, it could be worth more than the average UK house price of £222,000 recorded at the end of 2016. Someone with £30,000 of final-salary pension could be sitting on an asset worth £1m.

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'This shows just how valuable the pension is. It’s very easy to discount the importance of a payment which may not be available to you for a number of years in the future. But when you understand the current value of that income, you then realise how vital it is for you take a share of that value, rather than have all your share of the joint assets tied up in a house.'

3) Do think about the best way to split the assets

There are many different ways of splitting pensions assets, so it's important that you pick the right approach for you. Jamie Jenkins, Head of Pensions strategy at Standard Life, outlines the three main approaches:

Pension offsetting: This is where you and your partner balance how much the pension is worth against another asset, such as the matrimonial home. For example, if one of you has a large pension and you jointly own a home worth the same amount, you could agree that one of you keeps the property and the other the pension.

Pension earmarking: Here you can arrange that when one person's pension comes into payment, a portion of it will be paid to the other. Bear in mind that this means you will have to keep an eye on your ex’s pension, or they will need to keep an eye on yours, which may not be ideal if you’re both aiming for a clean break. Finally, unless you both retire at the same time, one of you may face a period without any income.

Pension sharing: This involves splitting a pension into two new pots. Each of you gets their own pension pot for the future. Since it involves more of a clean break, it's often a preferred method.

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Make sure you sit down with a financial adviser, and discuss all the options thoroughly with a divorce finance specialist before you make any decisions.

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